Another PIT-fall?
Once again, the culprit responsible for stirring the muddy waters of the law is, dear readers, the owner of Warsaw's largest bow tie collection and my office neighbor, Marcin Eckert. Gazeta Wyborcza refers to his unconventional views as "the Eckert interpretation." It's also become part of our daily professional jargon that is even used by our competitors, albeit slightly less willingly.
If you are not a certified tax advisor or an attorney-at-law and if reading tax magazines at bedtime is not one of your hobbies, you may easily have gotten lost in the jungle of legal terms thrown by the same in an attempt to firstly emphasize their case and secondly, though less importantly, to actually shed some light on this controversial topic.
An excerpt from an article in one of Poland's leading dailies demonstrates the point: "The provisions of Art. 10.1.2 and Art. 10.1.3 of the PIT Law do not, as a rule, cancel each other out as mentioned above but give rise to cumulative overlapping which serves to identify the persons under Art. 13.9 thus generating a category of taxpayers who personally carry on an economic activity related to the management of an entrepreneurial business."
To tell you the truth, I had to do a fair bit of reading myself before I could figure that one out. The couple of hours I spent flipping through newspapers, magazines and dictionaries on this occasion, only reinforced my periodically recurring urge to show the Polish legal community that legal issues, regardless of their complexity, can be broken down into simple concepts, and explained using basic vocabulary. So, hear me out.
The fiscal appeal of "managers" has deteriorated over the last few years. They started off as a highly motivated group of taxpayers who were given the right to utilize 20 percent statutory cost deductions against their income. They lived in happiness and prosperity until the day that, as rumor has it, a certain report landed on a certain finance minister's desk which raised the alarm regarding the swelling ranks of managers, a phenomenon first identified in the USA in the 1980s as "Too many chiefs, not enough (honest, taxpaying) Indians."
That is how the witch-hunt began. What followed was a wave of restrictive administrative as well as legislative measures, including the introduction of "management contracts" as a separate category of income, which still remains undefined in either Polish tax or civil law.
As a result, over the past two years, managers have been taxed according to the progressive tax scale (from 19 percent up to 40 percent) on their income earned under "management contracts" or for their duties as duly appointed members of the boards of directors or supervisory boards of companies. However, the law still favors individuals with limited liability to Polish tax (most often expatriates on limited term assignments to Poland) - they are entitled to benefit from the reduced 20 percent flat rate tax on management services and board fees.
Quite apart from the taxation of managers, the legislators introduced a preferential regime for the taxation of private entrepreneurs - they can elect to be taxed at the 19 percent flat rate from 1 January 2004. In anticipation of a massive tax driven reorganization of businesses, the creators of the law have limited eligibility of this regime to exclude services supplied to former or current employers during a statutory cooling-off period.
Now, coming to the main topic of this article - which also happens to be the subject of hot public controversy, otherwise referred to as "the Eckert interpretation" - it is possible to argue that management duties can be carried out as part of a registered entrepreneurial business and hence taxable at 19 percent flat rate.
The supporting legal argumentation is based on various definitions or the lack of them, namely: What is non-agricultural business activity? What is regular economic activity, as defined in various laws? What is economic activity carried out personally? What is freelance activity?
Some tax advisors focus on the fact that so long as the management services are carried out by engaging subcontractors, they fall outside the category of services performed "personally", which in turn makes it possible to utilize the 19 percent flat rate tax. Others underline the overriding importance of the existing conflict of terms, i.e. personally performed services are simultaneously included and excluded from the non-agricultural business activity definition provided in different articles of the same PIT Law.
For certain taxpayers who carry out management functions, this opportunity is associated with significant tax savings. Their main worry, of course, is the Tax Man's reaction. In practice, the fiscal authorities are very likely to disagree with this new interpretation. Moreover, the Ministry of Finance has already responded in a rather aggressive manner to the idea of managers paying 19 percent flat rate tax. Due to the ambiguity of the laws as well as the general complexity of the issue from an interpretational point of view, it will probably be up to the courts to have their final say.
In the meantime, a great number of taxpayers have already chosen to file, by January 20 2004, the form which allows for the choice of the 19 percent taxation regime. Hopefully, by the time their income reaches the 30 percent tax bracket, there will be some more clarity regarding this issue.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
If you are not a certified tax advisor or an attorney-at-law and if reading tax magazines at bedtime is not one of your hobbies, you may easily have gotten lost in the jungle of legal terms thrown by the same in an attempt to firstly emphasize their case and secondly, though less importantly, to actually shed some light on this controversial topic.
An excerpt from an article in one of Poland's leading dailies demonstrates the point: "The provisions of Art. 10.1.2 and Art. 10.1.3 of the PIT Law do not, as a rule, cancel each other out as mentioned above but give rise to cumulative overlapping which serves to identify the persons under Art. 13.9 thus generating a category of taxpayers who personally carry on an economic activity related to the management of an entrepreneurial business."
To tell you the truth, I had to do a fair bit of reading myself before I could figure that one out. The couple of hours I spent flipping through newspapers, magazines and dictionaries on this occasion, only reinforced my periodically recurring urge to show the Polish legal community that legal issues, regardless of their complexity, can be broken down into simple concepts, and explained using basic vocabulary. So, hear me out.
The fiscal appeal of "managers" has deteriorated over the last few years. They started off as a highly motivated group of taxpayers who were given the right to utilize 20 percent statutory cost deductions against their income. They lived in happiness and prosperity until the day that, as rumor has it, a certain report landed on a certain finance minister's desk which raised the alarm regarding the swelling ranks of managers, a phenomenon first identified in the USA in the 1980s as "Too many chiefs, not enough (honest, taxpaying) Indians."
That is how the witch-hunt began. What followed was a wave of restrictive administrative as well as legislative measures, including the introduction of "management contracts" as a separate category of income, which still remains undefined in either Polish tax or civil law.
As a result, over the past two years, managers have been taxed according to the progressive tax scale (from 19 percent up to 40 percent) on their income earned under "management contracts" or for their duties as duly appointed members of the boards of directors or supervisory boards of companies. However, the law still favors individuals with limited liability to Polish tax (most often expatriates on limited term assignments to Poland) - they are entitled to benefit from the reduced 20 percent flat rate tax on management services and board fees.
Quite apart from the taxation of managers, the legislators introduced a preferential regime for the taxation of private entrepreneurs - they can elect to be taxed at the 19 percent flat rate from 1 January 2004. In anticipation of a massive tax driven reorganization of businesses, the creators of the law have limited eligibility of this regime to exclude services supplied to former or current employers during a statutory cooling-off period.
Now, coming to the main topic of this article - which also happens to be the subject of hot public controversy, otherwise referred to as "the Eckert interpretation" - it is possible to argue that management duties can be carried out as part of a registered entrepreneurial business and hence taxable at 19 percent flat rate.
The supporting legal argumentation is based on various definitions or the lack of them, namely: What is non-agricultural business activity? What is regular economic activity, as defined in various laws? What is economic activity carried out personally? What is freelance activity?
Some tax advisors focus on the fact that so long as the management services are carried out by engaging subcontractors, they fall outside the category of services performed "personally", which in turn makes it possible to utilize the 19 percent flat rate tax. Others underline the overriding importance of the existing conflict of terms, i.e. personally performed services are simultaneously included and excluded from the non-agricultural business activity definition provided in different articles of the same PIT Law.
For certain taxpayers who carry out management functions, this opportunity is associated with significant tax savings. Their main worry, of course, is the Tax Man's reaction. In practice, the fiscal authorities are very likely to disagree with this new interpretation. Moreover, the Ministry of Finance has already responded in a rather aggressive manner to the idea of managers paying 19 percent flat rate tax. Due to the ambiguity of the laws as well as the general complexity of the issue from an interpretational point of view, it will probably be up to the courts to have their final say.
In the meantime, a great number of taxpayers have already chosen to file, by January 20 2004, the form which allows for the choice of the 19 percent taxation regime. Hopefully, by the time their income reaches the 30 percent tax bracket, there will be some more clarity regarding this issue.
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
